Writing from Lithuania, the author of this article argues that inconsistent interpretation of rules and sudden regulatory shifts are causing problems for fintech innovators in Europe.

The following article about regulations in Europe and the impact they may have on fintech innovation comes from Justinas Jarusevicius, partner at Lithuania-based law firm Motieka & Audzeviius.

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In June 2020, the fintech industry faced a defining moment as the Wirecard scandal unfolded, where the German payments giant admitted that €1.9 billion ($2.10 billion) was missing from its accounts, exposing a massive fraudulent scheme. The impact of this scandal was particularly felt in Lithuania due to allegations that a Lithuanian-based payments firm UAB Finolita Unio had been involved in misappropriating over €100 million from Wirecard shortly before its downfall. 

For countries like Lithuania, which had positioned itself as a burgeoning fintech hub, this event marked a turning point. Scrutiny of central banks and regulatory bodies intensified and prompted an overhaul in oversight frameworks and practices. 

This regulatory sea change raises a critical question for the future of fintech innovation in Europe: How can regulators strike the right balance between ensuring necessary oversight and creating an environment where fintech can thrive?

The answer, as is often the case, emerges in a process of probes and mistakes, some of which could be corrected when legal disputes occur. I recently worked on the ABC Projektai case, after the company's payments' licence was revoked. This decision was heavily criticised by the European Court of Justice and ultimately overturned by Lithuanian Supreme Administrative Court – highlighting a critical issue in our current regulatory environment. The interpretation of these laws and regulatory standards is often too loose and open to varying interpretations. This is yet another milestone marking the ever-evolving process of balancing the components of the regulatory mechanism. 

The rise of fintech hubs
Over the past decade, Europe has witnessed the rise of fintech hubs – centres of financial technology innovation that have reshaped the financial landscape. These hubs, scattered across cities such as London, Vilnius, Berlin, and Stokholm, have become crucial to Europe's economic ecosystem, serving as innovation hotspots that drive competition and economic growth.

Lithuania has emerged as a standout player among these hubs, rapidly gaining traction as a preferred destination for fintech companies. Over the past few years, the country has attracted around 270 fintech firms, including major players such as Revolut, drawn by its favourable regulatory environment and strategic position within the European Union.

However, Lithuania's ascent has not been without difficulties. The rapid influx of fintech firms coupled with the Wirecard controversy and accusations has prompted increased regulatory scrutiny as the country seeks to balance innovation with the need for oversight. The interconnectedness of fintech with sensitive sectors such as wealth management and private banking has only amplified these regulatory pressures. Fintech companies often provide the technological backbone for modern wealth management and private banking services, offering tools for portfolio management, risk assessment, and client communication as well as access to tailor-made banking services. As these traditional financial sectors increasingly rely on fintech solutions, they become more exposed to the regulatory demands faced by the fintech industry.

As Lithuania continues to meet these requirements, its experience offers valuable insights into the evolving landscape of fintech in Europe.

Balancing regulation and innovation
Fintech market growth comes with a unique set of challenges. In Lithuania, specifically, I am witnessing market players who largely support regulators' efforts to revoke licences from empty shell companies, entities without clear business operations, or those engaged in suspicious activities. However, these same players are increasingly frustrated by the inconsistent interpretation of rules and sudden shifts in regulatory focuses by the regulator. Companies are finding it difficult to plan when the regulatory ground beneath them feels unstable.

I have already mentioned the ABC Projektai case. The company had its payments' licence revoked over what essentially amounted to a technicality in the language relating to holding client payments for a certain amount of time. There is an increasingly concerning trend of companies receiving licences based on their business plans, only to later face criticism and severe penalties for alleged violations that stem from ambiguous regulations. This uncertainty not only creates frustration but potentially hampers these companies' ability to innovate and grow. 

It is a situation that, if left unaddressed, could significantly impact the future of fintech hubs across Europe.

Navigating the future of fintech hubs
The future of European fintech hubs depends on achieving a careful balance between innovation and regulation. In my experience, effective oversight requires three key elements: transparency, consistency, and adaptability. Regulators need to provide clear guidelines, apply rules uniformly, and remain flexible enough to keep pace with rapid technological advancements. 

Regulatory missteps carry costs far beyond monetary fines; they can cause significant reputational damage, impacting client relationships, pricing power, and the ability to expand into new markets. I have seen promising fintechs struggle to recover from regulatory sanctions, even when the issues were eventually resolved.

To manage these high stakes, fintech companies are increasingly investing in advanced compliance technologies. Automation, artificial intelligence, and big data analysis are becoming essential tools, not just for meeting regulatory requirements, but for driving efficiency and minimising regulatory compliance errors. Ultimately, the fintechs which use these technologies successfully will be in the best position to thrive in future fintech hubs.

The regulatory tightrope
If fintech hubs can learn from recent challenges and acknowledge the need to “step up” – as the Lithuanian regulator did following the ECJ's recent decision – we can see a path forward. This approach could allow fintech hubs to not only survive but thrive alongside necessary protective regulation. 

The key is striking a balance: maintaining financial system integrity while still pushing the boundaries of what is possible in fintech.

About the author
Justinas Jarusevicius is a partner at Motieka & Audzevius in Lithuania, a firm specialising in complex cross-border and national commercial litigation and arbitration. He leads the financial service dispute practice which focuses on regulatory litigation, contractual disputes, and asset recovery.

As an officer of the International Bar Association's Asset Recovery Committee, Justinas is recognised by Legal 500 and Who’s Who Legal as a Global Elite Thought Leader in Commercial Litigation and Arbitration.

Motieka & Audzeviius 
Motieka & Audzeviius is a business law firm specialising in effective dispute resolution and comprehensive corporate law services. The team is based in Lithuania's capital.